Isa funds: the 10 biggest winners during the crisis years

Five years after the collapse of Lehman Brothers we highlight the winners and
losers.

Five years ago this weekend the American investment bank Lehman Brothers filed for bankruptcy – an act that tipped the world's financial markets, already in turmoil, into a full-blown crisis.

The events that followed affected every saver and investor as they rushed first to protect their assets from the immediate fallout and then, after the worst had passed, tried to make the most of their money in a word of falling returns.

But did they make the right decisions?

Analysis by Telegraph Your Money suggests that many investors missed out on the greatest gains by turning their backs on Britain and other Western stock markets in the aftermath of Lehmans' collapse. Instead they favoured Asian and other markets, which seemed less obviously affected by a "Western" crisis.

By doing so, many missed the tremendous rebound staged by stock markets in the developed world, and the FTSE 100 in particular.

By Lehmans' collapse in September 2008 the FTSE 100, which had been above 6700 as recently as October 2007, was already down at around the 5000 mark, spooked by the collapse of Northern Rock, the onset of the credit freeze and growing anxiety about other banks' strength. Between Lehmans' collapse and March 2009 the FTSE had fallen by another 1500 points to just above 3500. That marked the trough.

Britain's economy flatlined, but its stock market bounced back. The rapidly growing economies of China, India, Russia and Brazil, by contrast, entered a period of more stock market turbulence – especially of late. An analysis of five-year performance across the 2,500-odd funds readily available to private investors in Britain, covering all geographical sectors, shows that the strongest market was, in fact, the UK. No fewer than 15 of the 20 top funds are those where the underlying holdings are British household names, such as Lloyds Banking Group and Tesco.

A number of UK funds that invest in less well-known stocks in the market also fared well. They include Fidelity UK Smaller Companies, which returned an astonishing 242pc, and Cazenove UK Smaller Companies, which has gained 170pc over five years. UK funds with a focus on smaller companies produced average returns of 90pc – or almost doubled investors' money.

Juliet Schooling Latter of Chelsea Financial Services, the broker, said UK smaller company funds had done well because many of Britain's smaller businesses went into the crisis with little debt. Many were also better placed to grow profits here and abroad. "UK smaller company stocks have been growing their earnings at a substantially faster rate than their larger peers over the past four years or so," she said.

"Smaller companies are also generally not in the telecoms, banking, mining and oils sectors, which are dominated by larger players and have not performed as well."

Even so, an investor in the average "UK all companies" fund, which invests across the entire London market, would have clocked up an average return of 60pc. UK funds that place a greater focus on dividends – those that fall into the "UK equity income" sector – have also done well. The average portfolio here has returned 59pc.

Patrick Connolly, a financial planner at Chase de Vere, said many British stocks did well because, despite being listed on the London market, they positioned themselves to benefit from earnings in faster-growing areas of the global economy – Asia and emerging markets. They increased this focus on emerging markets as the crisis intensified, even though by being London-listed they counted as UK companies. Around 80pc of the UK's stock market's earnings come from overseas – and at some individual companies the percentage is higher still.

There was an additional benefit in buying British when stock markets in emerging countries such as China, India and Brazil suffered sharp falls. This happened in 2011 and again, dramatically, in recent months. By being listed in London, many businesses, even if they derived revenues from those countries, were unscathed.

But as the graph above shows, investors' money tended to flow away from Britain in the years after Lehmans' failure. Strong flows, on the other hand, went into funds in the "global" and "global emerging markets" sectors, which returned 44pc and 41pc respectively over five years.

"Following Lehmans, investor sentiment turned from poor to downright doom, gloom and despair," said Mr Connolly. "What this meant is that perceived riskier assets such as UK smaller company stocks, which were already sitting at attractive valuations, were completely discarded."

Investors appear to have noticed the UK's strong performance, however – even if they are late to the party. In the first seven months of 2013, sales of UK funds have picked up markedly, with a total of £781m invested, according to the fund managers' trade body, the Investment Management Association.

How to decide which markets are best for your money

With the benefit of hindsight, investors caught up in the aftermath of Lehmans' collapse appear to have made the wrong choice. They withdrew funds from Western stock markets – which seemed to be at the epicentre of the banking crisis – and instead funnelled their money towards Asia, Brazil, Russia and other, apparently better, bets. How can investors make the right decisions in these circumstances?

Examine key measures of the 'value' of a market

Do-it-yourself investors have a challenge on their hands when trying to gauge if a share or stock market is cheap or expensive. But there are a number of valuation devices that are worth a look.

The simplest yardstick of value is the dividend yield. This is the income paid by an asset expressed as a percentage of its price. However, this measure has many limitations, as not all businesses or investors place value on income.

The price to earnings (PE) ratio is a more dependable measure of value, pitting the price of a share or market against its earnings rather than the income it chooses to pay out to shareholders. A more sophisticated version of the PE is the "cyclically adjusted PE" or Cape, also sometimes described as PE10 or the Shiller PE (after the Yale professor who invented it). This measures the ratio of a share or market price against an average of its earnings over the previous 10 years. The formula is commonly used to determine whether an asset – a share or market – is cheap or dear.

But Cape measures are not straightforward "buy" or "sell" signals. Markets might be cheap for a variety of factors. By the most recent Cape valuations, Greece, Argentina and Ireland are among the cheapest markets, while the US and Japan are among the most expensive. The UK market's Cape is currently below average. This suggests that our markets have more to offer despite delivering stellar performance since the financial crisis.

…or leave these decisions to an expert

If you do not trust yourself to spot which markets will perform best, leave it to the experts. There are a number of "generalist", globally invested funds whose managers have the flexibility to navigate the world's markets hunting for the best opportunities.

A number of investment trusts – portfolios structured as companies that are quoted on the London Stock Exchange – use this approach. A famous example is Foreign & Colonial investment trust, launched in 1868. The company invests in stocks listed across the globe, with a particular focus on valuations. At present the £2.7bn trust has 22.1pc of its money in Britain and just 8.5pc in global emerging market economies.

Personal Assets Trust is a very different, smaller fund, whose overriding aim is to preserve shareholders' capital. It also has the flexibility to move money across a wide range of markets and assets. Sebastian Lyon, the fund manager who oversees the company, currently has the majority of the portfolio split between gold, bonds and American and British shares.

Drip-feed your money in over a period

Buying shares or funds in small tranches rather than one-off lump sums saves investors from buying high and selling low. Investors who do opt to invest a lump sum can potentially make bigger returns but the risk of losing more of your money is also far greater.

Juliet Schooling Latter of Chelsea Financial Services, the broker, said: “Mr Wright has run the fund since its launch in February 2008 so had a real baptism of fire. He's proven himself to be an excellent smaller company’s manager though and takes an unusual approach compared with his peers, being value rather than being growth-orientated.”

In second place is a fund run by a small “boutique” firm which rarely crosses investors’ radar because it is not run by a mainstream fund management company. But despite this Unicorn UK Income, managed by John McClure, has returned 184pc over five years. The fund invests in small UK business, such as cinema chain Cineworld, rather than big blue chips such as BP.

Ms Schooling Latter said this had served the fund well as smaller sized UK businesses have outperformed their larger peers since the credit crisis.

Taking the bronze medal is the Legg Mason Japan Equity, run by Hideo Shiozumi, who has 40 years' experience managing Japanese equities. The fund has delivered a 170pc return over five years, but the majority of the returns have come in 2013 on the back of Japan’s booming economy.

“This is a very volatile fund as it invests in small-cap Japanese stocks, but when the conditions are right it can perform very well, very quickly as we have seen in recent months,” added Ms Schooling Latter.

The rest of the top 10 is dominated by a number of UK equity funds which all managed to double your money over the last five years despite UK economic growth flatlining since the financial crisis.